Friday 25 October 2013 12.32 EDT
First published on Friday 25 October 2013 12.32 EDT

Leading shares hit a five month high this week on a host of positive economic news and growing hopes that the US Federal Reserve will keep the money taps switched on.

The FTSE 100 finished at 6721.34 on Friday, up 8.16 points on the day and just shy of 100 points on the week, its best level since 28 May.

At the start of the week came the US non-farm payroll figures, delayed because of the now-resolved government shutdown. They proved worse than expected, showing a 148,000 rise in jobs in September rather than the forecast 180,000 increase. But analysts said the data meant the Fed, whose next policy meeting starts on Tuesday, was unlikely to begin easing its $85bn a month bond buying programme this year.

An early snapshot of Chinese manufacturing for October was better than expected, although some of the shine was taken off by concerns about a growing credit crunch in the county. On Friday came positive UK GDP figures showing a 0.8% rise in the third quarter, which added to the positive sentiment.

Mike van Dulken, head of research at Accendo Markets, said:

Risk appetite remained supported by the US fiscal resolution (albeit short term, be prepared for a re-run), a welcome rebound in China PMI manufacturing, continued recovery for UK GDP and - as strange as it sounds - the fallout from the government shutdown. Lost jobs, output and skewed data is likely to force the US Federal Reserve to delay plans to taper its QE3 stimulus programme until 2014 meaning continued easy monetary policy for longer.

Reckitt Benckiser was in focus as it announced a strategic review of its pharmaceuticals business, best known for its Suboxone heroin addiction treatment. Analysts suggested the review could lead to a sale of the division, which they calculated could be worth up to £5.5bn. Reckitt rose as high as £48.05 before slipping 25p on Friday to £47.80, still nearly £3 up on the week.

Unilever confirmed its warning in September of a slowdown in emerging markets, reporting a 3.2% rise in third quarter sales, down from 5% in the previous three months. Its shares slipped 16p to £24.93.

Vague bid talk surrounded RSA Insurance, up 0.4p to 126.8p, as well as British Land, 5p better at 628p.

A number of retail bosses decided to cash in after reporting strong sales growth. Sports Direct International founder Mike Ashley sold £106m worth of shares in the company at 662.5p each, while Asos chief executive Nick Robertson raised around £80m and finance director Nicholas Beighton £12m from disposing of share options. Robertson reportedly paid £2.8m of his gains to Asos staff as bonuses.

Two outsourcing groups caught up in an investigation into some of their government contracts both announced executive changes. Serco said chief executive Chris Hyman was resigning, and its shares added 5p to 557.5p. G4S rose 5.5p to 258.5p as UK chief executive Richard Morris became the latest to leave. HSBC analysts raised their rating from underweight to neutral and their target price from 205p to 250p, saying:

Business fundamentals remain challenging in Europe and may precipitate a weak close to 2013. However, hopes that value can be unlocked through breakups and a rejuvenated strategy are likely to buoy G4S' stock through what is perceived as a rump of difficult trading.

Banks had a volatile week, following concerns about a credit crunch in China and tougher than expected stress tests from the European Central Bank. But they recovered by the end of the week, with Royal Bank of Scotland 11.9p better at 368.4p on talk that Morgan Stanley had been appointed to lead a flotation of its US business Citizens.

Lloyds Banking Group added 0.25p to 80.37p after confirmation it was in talks to sell its Scottish Widows Investment Partnership to Aberdeen Asset Management, up 8.7p to 459.1p, for up to £500m. Aberdeen plans to issue shares to Lloyds as part of the deal, giving the state owned bank a stake in the fund management group.

Miners benefited from the positive manufacturing figures from China, a key consumer of commodities. BHP Billiton was 3p better at £19.53p while precious metal specialist Fresnillo rose 15p to £10.37 after it announced a $165m payout to shareholders on Thursday.

As the US reporting season continued, Microsoft impressed with a better than expected 17% surge in third quarter profits, while Amazon also beat forecasts. Apple's week was dominated by two i's - the launch of its latest iPads and news that billionaire investor Carl Icahn called on the company to use its cash to buy back $150bn worth of shares. Apple shares slipped nearly 5% in early trading on Friday, ahead of results next week.

Arm, the Cambridge-based chip designer which is one of Apple's key suppliers, failed to benefit from the iPad launch. Its shares recovered 22.5p to 983p but still ended 31p lower on the week as analysts fretted about a slowdown in royalty revenues, as revealed by the company's third quarter figures.

Royal Mail shares hit a new closing high of 555p, up 26p as one of the earliest City brokers to suggest it was undervalued has upped its valuation.

Associated British Foods, the sugar to Primark business, added 28p to £21.33 as Morgan Stanley raised its price target from £21.40 to £22.65 with an overweight recommendation:

Negative market trends have heaped pressure on sugar. However, with most of the bad news now absorbed, we expect Primark to become the key driver of the ABF story. This should narrow the valuation gap with EU clothes retailers and help the stock to re-rate.

BSkyB was in demand for much of the week as it continued to shrug off challenges from rivals, but then suffered profit taking and fell 21.5p to 928.5p.

City analysts continued to debate whether Vodafone, down 2.15p at 226.75p, could receive a bid from AT&T once the deal to sell its stake in its US wireless joint venture to partner Verizon is complete. Credit Suisse was the latest, saying a bid of up to £80bn would be needed to convince Vodafone to sell. The bank said:

We raise our price target to 245p [from 195p] per share to reflect increased forecasts and an assumed 50% probability of a bid from AT&T.

We calculate that Vodafone could increase its own value in a defence scenario by leveraging up more than the 0.7 times debt/EBITDA Vodafone is currently targeting. AT&T would then have to bid up to £80bn to overcome Vodafone's potential scepticism of the deal synergies and the impact of free cash flow/share dilution on the value of AT&T shares received.

However, we note that such a bid could put AT&T's own dividend cover at risk – a possible red line for the company – particularly if its US mobile growth stalls next year. We also see little logic to AT&T in such a footprint deal, with few if any synergies, no big change in EU spectrum regulation coming and leaving Vodafone exposed to the same 4play problem it has today. So despite the repeated comments by AT&T (widely reported by Reuters and others in recent weeks) that it is interested in buying large European mobile assets, we place only a 50% probability of an AT&T bid for the Vodafone stub happening.

With downside to 210p if no bid, and a 50% probability of upside to 280p per share if AT&T does bid, we raise our target price to the midpoint 245p, supported by our increased forecasts.

Finally TalkTalk Telecom fell 1.3p to 264.4p as analysts at Berenberg issued a sell note but pointed out a forgotten contract which could prove valuable to the company. The bank said:

Back in May 2012, TalkTalk and Fujitsu won the wholesale contract for the Post Office from BT Wholesale. Some had estimated this five-year contract to be worth as much as £500m, with TalkTalk providing the broadband/telephony access. Since 2012, though, there has been little talk regarding this contract. On further investigation, we believe this contract could be significant.

The Post Office does not provide any specific figures regarding its customer numbers, but having called its call centre, it became clear to us that it has over 500,000 subscribers – making it the largest ISP after Everything Everywhere. If we assume TalkTalk takes 70% of the £100m a year contract value, this .. could imply an incremental £17.5m of earnings per year. This is worth an incremental 20p to the TalkTalk share price and drives our increased discounted cash flow-driven valuation to 195p.

This does not affect our fundamental longer-term thesis that both BT Sport and fibre will have a negative impact on the fundamentals of TalkTalk's business. However, despite the migration process for the Post Office contract starting at the end of the second quarter, nothing has been flagged ahead of the quarter.